As Hurricane Sandy bears down on the Eastern seaboard, it seems appropriate to take a look at some of the storm clouds on the horizon for the markets other than the fiscal cliff. The market gave back almost 2% last week and I believe we are in the midst of an at least 5% to 10% correction. Investors should move to a more defensive stance if they have not already done so. Raising cash is probably prudent if it does not already exist in your portfolio. There should be better entry points in the months ahead.
10 Things to worry about besides the Fiscal Cliff.
- The so called "Frankenstorm" has the potential to disrupt the stock exchanges or at the very cause volume to shrink significantly early next week. This means any move in the market could be more volatile than normal.
- Around halfway through the earnings season and S&P earnings like they are on track for a 3% decline Y/Y, the first loss since the recession ended. The last time corporate profit growth turned negative in the third quarter of 2007 and we know what that was a prelude to.
- Corporate profit margins are at an all-time high so it is unlikely corporations can squeeze much more out of the bottom without significant revenue growth which does not appear to be forthcoming.
- I would also be wary of the 2% GDP figure release Friday. Much like the September jobs report earlier in the month, it seems that government activity has oversized impact in the improvement in the figure with Defense spending up 13% in the quarter. Without the biggest uptick in defense spending since the second quarter of 2009, GDP would have been flat with last quarter with a 1.3% gain.
- Speaking of the September jobs report, the October jobs report comes out on Friday. Look for the headline unemployment to tick up as some of the "anomalies" of the previous report get adjusted.
- Manufacturers are struggling. Outside of defense, capital goods orders are down 10% Y/Y.
- Commodity prices are in free fall over the last few weeks. I would look for dismal earnings report in the material sector like the one of Cliff Natural Resources (CLF) last week.
- Lawrence Fink of Blackrock, one of the largest asset managers in the world, is calling to take some chips off the table. Among his worries are slowing growth and the upcoming fiscal cliff. Fink doesn't prognosticate often so I take his words seriously.
- The election is a big wildcard on the horizon. Based on the polls, both state and national, I can easily see a split decision. Where Governor Romney wins the popular vote and President Obama squeaks out by a few electoral votes. Anyone who thought the election of 2000 was ugly, will look back fondly on that aftermath given the how partisan our current politics are.
- Let's also not forget about Europe. Spain just hit record unemployment of 25% and is probably weeks away from a formal bailout. The next big general strike is schedule for November 14th. Bank bad loans are growing rapidly there with Caixabank doubling its bad loan numbers to $26.3B Y/Y.